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Saturday, October 11, 2008

Marion Post Wolcott Tom and Huckleberry June 1940Cajun boys fishing in the bayou near Schriever, Louisiana, near Terrebonne Parish School.

Ilargi: I don’t know guys, I smell fish around here. The Fannie and Freddie swaps auction on Monday returned 90+ cents on the dollar, and the same auction for Lehman on Friday lost 90+ cents on the dollar.

So I ask myself: who’s doing the buying? Now, it was clear from the get-go that Paulson et al were in on picking the Fan&Fred party music; who else overpays 800% or more on toilet paper? That’s just got to be someone playing with other people’s money. That doesn’t just smell like fish, that is a all-out glib bald mackerel. Insert Hank the Hammer pic.

A more realistic valuation came in the Lehman "settlement" [sic]. 8.5 cents on the buck. Ya-bleeding-bleeping Hoo!

Nah, want to know what I think? I think the banks and funds bought back their own swaps in that one. You know, save face, and all that. Besides, who cares anymore? They buy it back, and Monday morning Paulson offers to get it off their sheets, at the same 800% overpay, with your money. Dead Stinky Fish. Glib and salty.

Henry got another little sideshow set up as well. Forget about the $700 billion Roman Dictatorship Proclamation. Now, Fannie and Freddie, on top of that fully loaded chewed-up tobacco spit-ball on the Constitution, are forced to buy up half a trillion dollars worth of mortgage toilet paper over the next year, and that amount could grow beyond infinity.

Don’t bother checking for your wallet; you gave it away last week, remember?

Now I see otherwise sane people claim that these auctions confirmed some sort of value for the swaps, and I just ain’t getting that. Don’t they understand how rigged the game is by now? Karl, wake up!

Yes, I agree, the paper needs to be exposed. But that doesn’t offer any hope; it will mean the end of banking as we know it. Which in turn will signal the end of society as we know it. The whole economic system is gone, it’s sleeping with the fishes.

$5 trillion vanished from the stock markets in one week, and I bet you, there’ll still be folks talking about (hyper-)inflation. Who needs logic anymore to make sense of the world around us? When faith can do it?

If nobody’s left who can afford to make an offer on your home, it’s worth nothing. The markets work, just not the way we’d like.

And if nobody offers anything for casino toilet paper, then that isn’t worth dick-all either. And since any value we assign to people these days, and the environment, and food, and drinking water, all is calculated as all other commodities, in a market that is dying, none of it all has any value left.

You now cost more to maintain than you deliver in productivity.

You have been written off.

And so have your kids.

The markets do work.

My friend François sends this graph from the St. Louis Fed. I suggest you take a good long hard look:

The global economy is losing more money from the disappearance of forests than through the current banking crisis, according to an EU-commissioned study. It puts the annual cost of forest loss at between $2 trillion and $5 trillion.

The figure comes from adding the value of the various services that forests perform, such as providing clean water and absorbing carbon dioxide. The study, headed by a Deutsche Bank economist, parallels the Stern Review into the economics of climate change. It has been discussed during many sessions here at the World Conservation Congress.

Some conservationists see it as a new way of persuading policymakers to fund nature protection rather than allowing the decline in ecosystems and species, highlighted in the release on Monday of the Red List of Threatened Species, to continue. Speaking to BBC News on the fringes of the congress, study leader Pavan Sukhdev emphasised that the cost of natural decline dwarfs losses on the financial markets. "It's not only greater but it's also continuous, it's been happening every year, year after year," he told BBC News.

"So whereas Wall Street by various calculations has to date lost, within the financial sector, $1-$1.5 trillion, the reality is that at today's rate we are losing natural capital at least between $2-$5 trillion every year." The review that Mr Sukhdev leads, The Economics of Ecosystems and Biodiversity (Teeb), was initiated by Germany under its recent EU presidency, with the European Commission providing funding.

The first phase concluded in May when the team released its finding that forest decline could be costing about 7% of global GDP. The second phase will expand the scope to other natural systems. Key to understanding his conclusions is that as forests decline, nature stops providing services which it used to provide essentially for free. So the human economy either has to provide them instead, perhaps through building reservoirs, building facilities to sequester carbon dioxide, or farming foods that were once naturally available.

Or we have to do without them; either way, there is a financial cost. The Teeb calculations show that the cost falls disproportionately on the poor, because a greater part of their livelihood depends directly on the forest, especially in tropical regions. The greatest cost to western nations would initially come through losing a natural absorber of the most important greenhouse gas.

Just as the Stern Review brought the economics of climate change into the political arena and helped politicians see the consequences of their policy choices, many in the conservation community believe the Teeb review will lay open the economic consequences of halting or not halting the slide in biodiversity. "The numbers in the Stern Review enabled politicians to wake up to reality," said Andrew Mitchell, director of the Global Canopy Programme, an organisation concerned with directing financial resources into forest preservation.

"Teeb will do the same for the value of nature, and show the risks we run by not valuing it adequately." A number of nations, businesses and global organisations are beginning to direct funds into forest conservation, and there are signs of a trade in natural ecosystems developing, analogous to the carbon trade, although it is clearly very early days.

Some have ethical concerns over the valuing of nature purely in terms of the services it provides humanity; but the counter-argument is that decades of trying to halt biodiversity decline by arguing for the intrinsic worth of nature have not worked, so something different must be tried. Whether Mr Sukhdev's arguments will find political traction in an era of financial constraint is an open question, even though many of the governments that would presumably be called on to fund forest protection are the ones directly or indirectly paying for the review.

But, he said, governments and businesses are getting the point. "Times have changed. Almost three years ago, even two years ago, their eyes would glaze over. "Today, when I say this, they listen. In fact I get questions asked - so how do you calculate this, how can we monetize it, what can we do about it, why don't you speak with so and so politician or such and such business." The aim is to complete the Teeb review by the middle of 2010, the date by which governments are committed under the Convention of Biological Diversity to have begun slowing the rate of biodiversity loss.

A frenzied day of panic selling on stock markets across the world capped a week of extraordinary financial mayhem in which £2.7 trillion was wiped off the value of shares globally.

Finance ministers and central bank chiefs from the West’s leading economies attempted last night to quell the markets’ fears with moves to shore up their banking systems and prevent a full-scale meltdown of the world financial system. Such was the level of panic, however, that officials gathered in Washington were forced to contemplate the previously unthinkable: that Britain’s enfeebled banks may face outright nationalisation if Gordon Brown’s £50 billion bailout fails.

As stock markets on both sides of the Atlantic suffered record-breaking falls, ministers and central bank governors from the Group of Seven leading economies strove to piece together a united plan to avert financial cataclysm. In a statement last night the G7 said that the present, extreme situation “calls for urgent and exceptional action” and pledged to make decisive collective moves to stabilise markets. The G7 agreed to “take all necessary steps” to unfreeze paralysed money markets, and ensure that banks could secure new capital “in sufficient amounts to reestablish confidence”.

The US led other leading economies in moving to follow Britain’s scheme to inject capital into their banking systems. Henry Paulson, the US Treasury Secretary, announced that Washington would soon use part of America’s $700 billion (£400 billion) emergency bailout fund to take ownership stakes in vulnerable US banks. The German Government is also working on a similar scheme, it emerged.

The moves came after the Dow Jones industrial average opened on Wall Street yesterday with an 8 per cent plunge. It rose later in the day, but closed 1.49 per cent down at 8,451. In London, the FTSE 100 index closed down 381.7 points, or 8.9 per cent, at 3,932.1, succumbing to its second-biggest points loss ever. The FTSE 100 has now had 24 per cent of its value wiped out over this week.

The financial crisis sweeping the global economy is one of the most serious challenges ever, leading to a sharp slowdown in growth, US Treasury Secretary Henry Paulson said on Saturday. "As we meet today, risks to the global economic environment are the most serious and challenging in recent memory," Paulson told the International Monetary Fund annual meeting.

"The financial turmoil over the last year, coupled with significant ongoing financial de-leveraging, commodity price shocks and necessary adjustments in housing and other markets are causing a sharp slowdown in economic growth," he said, according to the prepared text of his speech. Paulson said that while the crisis was affecting the main advanced economies most acutely, emerging market countries, despite recent progress made, "are not immune from the global financial stress."

The secretary said this "is a very challenging period for the United States, as well as the global economy," noting that with the credit markets frozen, the financial crisis was now spreading into the wider economy. "These extraordinary events require a global response and financial officials from around the world are working together, taking action individually and collectively as necessary, to address these challenges."

The focus of policy was on five areas -- providing liquidity, strengthening capital, protecting investors, enlarging the macroeconomic response and improved regulation. Paulson said that "once we are past this difficult period, we must turn our attention to longer-term reforms to modernize our outdated financial regulatory structure and address other weaknesses."

Turning to the IMF itself, Paulson said "a strong and effective IMF is firmly in the interest of the United States and the international community" but cautioned it against casting its net too wide. "As it reviews its lending role, the Fund must keep its core mission in mind and resist seeking creative ways to boost lending for its own sake. We are skeptical of proposals to significantly increase access levels for lending."

The IMF and World Bank are holding their annual meetings in Washington this weekend against a backdrop of untold upheaval as a credit crunch sparked by the US subprime home loan collapse undermines the accepted norms of financial life. The crisis has so far overshadowed the meetings.

A string of countries face the risk of "going bust" as financial panic sweeps Asia, Eastern Europe, and Latin America, raising the spectre of a strategic crisis in some of the world's most dangerous spots.

Nuclear-armed Pakistan is bleeding foreign reserves at an alarming rate leading to fears that it could default on its loans. There are mounting fears that Ukraine, Kazakhstan, and Argentina could all now slide into a downward spiral towards bankruptcy, while western banks exposed to property bubble across Eastern Europe have seen their share price crushed. The markets are pricing an 80pc risk that Ukraine will default, based on five-year credit default swaps (CDS) – an insurance policy on a country being able to pay its debts.

The country's banking system has begun to break down after years of torrid credit growth; its steel mills are shutting as demand collapses; and the political crisis is going from bad to worse. President Viktor Yushchenko dissolved parliament this week in a dispute that risks bitter conflict with the country's Russian bloc. Diplomats fear Moscow could be drawn into the crisis – or even use it as a pretext to occupy territory in a replay of the Georgia invasion this summer. Ukraine's government seized Prominvestbank this week, suspending payments to creditors. It closed the Kiev stock market, which has fallen 73pc this year.

Emerging market stocks have been tumbling since their peak in October, when investors were still betting that rising stars such as the BRICs (Brazil, Russia, India, China) were now strong enough to shake off a US crisis. That illusion has been shattered. The International Monetary Fund said it is mobilising a "rapid-fire" fund worth several hundred billion dollars to stop a domino collapse across the developing world.

The trigger for the latest round of capital flight has been the lightning implosion of Iceland. BNP Paribas warned clients yesterday that the island is heading for "sovereign default" with contagion risks for other economies that have been living beyond their means on foreign credit. Hungary had to intervene yesterday to prop up its markets following a run on country's biggest lender OTP. The Budapest bourse fell 13pc. The treasury had to scrap a bond auction. The most new mortgages in Hungary are in Swiss francs, leaving the homeowners facing a vicious squeeze as the forint plunges against the franc.

In Pakistan, the rupee has fallen to an all-time low. Standard & Poor's downgraded the country's sovereign debt to near write-off levels of CCC-plus. The central bank's foreign reserves have fallen to $4.7bn (£2.73billion). "The danger of default is hovering," said Professor Kaisar Bengali from Karachi University. "Pakistan may not be able to re-pay its debt or import anything," he said, adding that the country cannot assume that it will be bailed out for strategic reasons.

Default risk on Kazakhstan's top banks has risen to 70pc as property bubble bursts in the former Soviet republic and reliance in foreign credit comes back to haunt. The country has mortgaged its future to oil prices, which crashed below $80 a barrel yesterday as the whole nexus of commodities (except gold) buckled in a wave of forced selling. Analysts warn that it is leading indicator for what could happen in Russia if crude falls much further.

Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program.

The Federal Housing Finance Agency, which placed the two companies in conservatorship on Sept. 7, directed them last month to start increasing their purchases of loans and mortgage-backed securities as the Treasury seeks to absorb underperforming and illiquid assets from financial companies. "For now, they're under conservatorship and they have to be used to keep the flow of capital going to the housing market," former Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television's "Conversations with Judy Woodruff." "They're important to maintaining the flow of government finance" and need to be used actively, he said.

Adding underperforming assets to Fannie and Freddie's combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program, their regulator said Oct. 5. Neither Fannie nor Freddie has turned a profit in the past year, accumulating $14.9 billion in combined quarterly losses, largely related to bad subprime and Alt-A mortgage assets.

"The overall goal of the program will be to contribute greater stability and liquidity in the mortgage market, which should enhance consumers' access to mortgage financing and ultimately result in reduced mortgage interest rates," FHFA Director James Lockhart said in a Sept. 19 statement.

Subprime loans were given to borrowers with poor or limited credit records or high debt burdens. Alt-A loans were made to borrowers who wanted atypical terms such as proof-of-income waivers, without sufficient compensating attributes. About 35 percent of subprime loans in non-agency mortgage securities are at least 60 days late, while 15 percent of Alt-A loans are, according to a Sept. 9 report by FTN Financial Capital Markets.

Non-agency, or private-label, bonds are issued by banks and don't carry guarantees by Fannie, Freddie or government-agency Ginnie Mae. Freddie held about $207 billion in non-agency debt in its $760.9 billion portfolio as of August, according to its latest monthly volume summary. Fannie had about $104 billion of such securities in its $759.9 billion portfolio in August.

Regulators initially restricted Fannie and Freddie's growth when they seized control of the government-sponsored enterprises Sept. 7. To "promote stability" and lower mortgage costs to borrowers, Treasury Secretary Henry Paulson said the two would be allowed to "modestly increase" their mortgage portfolios to as much as $1.7 trillion through the end of next year and said they would no longer be run "to maximize shareholder returns." Less than two weeks later, Fannie and Freddie were told to ramp up their mortgage bond purchases as the financial crisis deepened and credit activity came to near standstill.

Fannie and Freddie which own or guarantee almost half of the $12 trillion U.S. home loan market, were given access to $200 billion in emergency Treasury financing as part of their rescue package. The companies may also be able to sell their bad debt to the Treasury through its $700 billion financial-rescue program signed into law Oct. 3. FHFA has said the companies plan to release third-quarter results next month as scheduled. Analysts surveyed by Bloomberg project losses for both Fannie and Freddie at least through 2009.

First the house of Lehman fell. Now the insurance bill is coming due. Nearly three weeks after the Wall Street bank sank into bankruptcy, financial companies and investment funds that wrote what are effectively insurance policies on Lehman Brothers’ debts are being called on to pay hundreds of billions of dollars in claims.

Whether those claims can or will be paid, and the financial repercussions that could follow if they are not, will signify the biggest test yet for the vast, unregulated market in credit-default swaps. The danger is that the claims on the Lehman default are so large — they are estimated at $400 billion to $600 billion — that settling them could leave some companies with large, perhaps even crippling, losses and heighten the turmoil in the financial markets.

The magnitude of the exposure came into focus on Friday, when the price of Lehman’s bonds was set via a closely watched auction on Wall Street. The debt was priced at a little above 8 cents on the dollar, leaving companies and funds that insured these debts against default on the hook for the remainder. The price determined the amount that sellers of bond-default protection would have to pay those who bought their protection, called counterparties. The lower the bonds’ price fell, the higher the payouts were going to be.

But even now, the total amount coming due is unknown because the market for credit-default swaps is not regulated or tracked through any clearinghouse of data. “The huge value of credit-default swaps on Lehman Brothers, and the low price obtained in this auction, mean there are billions of dollars in obligations,” said Eric R. Dinallo, the New York State insurance superintendent. “No one knows who owes this money, how much each counterparty owes, or whether any of these counterparties will now be in trouble themselves, with further potential problems for the financial markets.”

Some of those on the hook will quietly settle their trades as they come due, mostly within the next two weeks, and keep doing business as usual. To the extent there are problems, the world may find out about it only when another financial services company discloses its exposure or perhaps even collapses.

Mr. Dinallo and Gov. David A. Paterson have said that New York State should regulate credit-default swaps to some extent, because they are similar to insurance, which is regulated at the state level. The regulators pay attention to how much coverage insurers write and how much they charge, to make sure they do not get in over their heads and collapse.

Swaps, on the other hand, are private contracts between two counterparties, so no regulator keeps track of who is promising coverage to whom, or whether the swap seller can really afford the coverage being promised. Complicating things further, it is possible to buy and sell credit-default swaps without owning the underlying bonds. One trader can both buy and sell protection on the same bonds, too. These complexities make it hard to know exactly how much risk lies in the Lehman Brothers default.

Separately on Friday, the Federal Reserve Bank of New York met with representatives of the derivatives industry to review proposals for the creation of a credit-default swaps clearinghouse. The Fed asked for more information about how competing proposals would work, and had not made any decisions as of Friday.

Officials say they believe that if the swaps were traded through a central body, the volume of trading could be tracked and prices would become clear. Investors would stand a better chance of noticing when a company was taking on too much risk, and could dump its stock before disaster struck. That kind of market discipline might force traders to manage their risks more carefully. But the clearinghouse will only help the swaps market in the future. In the meantime, the financial markets do not know where the next disaster might be.

Market participants were expressing particular concern about the amount of money that the American International Group, the insurance giant that was effectively nationalized, would have to pay as it settled its swap positions on Lehman Brothers’ debt. A.I.G.’s financial products unit was a major issuer of credit-default swaps. A spokesman for A.I.G., Nicholas J. Ashooh, said on Friday that the big insurer was not able to provide a figure. It was billion-dollar obligations falling due under the terms of A.I.G.’s swaps contracts on other issuers’ debt that led to the company’s collapse in mid-September.

Julie A. Grandstaff, a managing director of StanCorp Investment Advisers, said the outcome of Friday’s auction was “really extraordinary, in that it’s a large bankruptcy and a small recovery value.” She was concerned that some counterparties might have to make payments big enough to deplete their capital, which could lead to possible ratings downgrades. Capital depletion is a serious problem at the moment because the capital markets are largely frozen and companies cannot easily raise new money if they need it.

“If you exhaust it all in one event, that will cause the ratings agencies to think about whether to downgrade you,” Ms. Grandstaff said.

Morgan Stanley was racing on Friday to secure its financial lifeline from a big Japanese bank as confidence in the embattled Wall Street bank continued to erode. Investors have begun to question whether the Japanese bank, the Mitsubishi UFJ Financial Group, will go through with its $9 billion investment, or, if it does, whether that will be enough to safeguard Morgan Stanley. Both sides insist the deal will close on Tuesday.

But some investors have begun to float several other options for Morgan Stanley, the once-proud offshoot of the Morgan banking empire. Some suggest Mitsubishi might buy the entire firm. Others say Morgan Stanley could seek a merger with a bank in the United States. And still others say the federal government might buy into the besieged firm. The growing concern over the fate of Morgan Stanley was evident in the stock market on Friday. Shares of the bank fell 22 percent, or $2.77, to $9.68, less than half its value at the beginning of the week. The decline left the shares down nearly 82 percent this year.

Already, Mitsubishi is considering adding a credit facility to the deal that Morgan Stanley could draw on if trouble hit, according to a Morgan Stanley executive not authorized to share details on the record. Mitsubishi executives are in Washington this weekend for meetings of the International Monetary Fund. Morgan Stanley has been in close contact with the bank all week. In particular, Morgan Stanley executives warned the Japanese bank that its shares would probably come under attack on Thursday after the end of a temporary ban on short-selling, a tactic used to bet against a company’s stock price.

Analysts said it was difficult to fathom why the stock price of Morgan Stanley was spiraling down. “I think you have truly one of the very top investment banking franchises in Morgan Stanley,” said Jeffrey Harte, an analyst with Sandler O’Neill. “As an analyst, we can do fundamental analysis of companies, but as an analyst, it’s hard to do fundamental analysis of market sentiment.”

Morgan Stanley converted itself into a bank holding company one week after Lehman Brothers collapsed last month. That business model makes it easier for Morgan Stanley to borrow from the Federal Reserve. Morgan Stanley held preliminary discussions with Citigroup about a possible combination in the days before it reached an agreement with Mitsubishi.Citigroup and JPMorgan Chase declined to comment on Friday about whether they might consider a merger with Morgan Stanley.

Mitsubishi has large ambitions for expansion into the United States. It recently purchased the remaining shares of UnionBanCal, a bank in California, for a premium over its share price. Mitsubishi had owned the majority of UnionBanCal since 1996. Nearly three weeks ago, Mitsubishi struck its deal with Morgan Stanley at $25.25 a share, and that premium, growing by the day, has caused some people to question whether Mitsubishi would seek to renegotiate. Of Mitsubishi’s $9 billion investment, only $3 billion is in common stock and only that portion is directly affected by the sinking share price of Morgan Stanley.

Mitsubishi and Morgan Stanley plan to create a strategic committee to chart out future cooperation after the close of the deal. In particular there may be logical combinations in their Japanese operations, a Morgan Stanley executive said.It is not part of the current deal for Morgan Stanley to have access to Mitsubishi’s more than $1 trillion balance sheet, but that is a topic the banks plan to address, the executive said. A spokesman for Mitsubishi did not return a request for comment on Friday. A spokeswoman for Morgan Stanley said that nothing had changed in the deal and the banks were not renegotiating.

The war of words between Britain and Iceland has intensified as Iceland’s prime minister accused Gordon Brown of undermining his country’s economy. Geir Haarde also confirmed that Icelandic creditors will get priority over British customers as the country’s fallen banks’ money is returned.

British savers and companies and a growing range of public bodies all have billions of pounds potentially trapped in collapsed Icelandic banks. The prospect of that money being lost this week drove Mr Brown to publicly threaten retaliation against Icelandic firms and question the country’s economic prospects. At a press conference in Reykjavik, Mr Haarde said Mr Brown’s outspoken public threat to seize the assets of Icelandic companies was “illegal.”

He said that the British Government’s assessment of Iceland’s prospects had fuelled the collapse of the country’s currency. Iceland’s banking collapse is threatening its entire economy, and the country is widely expected to seek financial aid from the International Monetary Fund in the coming days. Mr Haarde said: ”The remarks made by Gordon Brown were unfortunate and dispiriting. It was not very helpful to say that our country is virtually in default, which is not a true description. The suggestion was not helpful to us as far as the markets were concerned today

He added: “Everybody needs to show some flexibility and I won’t be sanctioning any illegal behaviour like Prime Minister Gordon Brown suggested. ”Hopefully in the situation between us there will be no further damage done.” A team of officials from the Treasury and the Bank of England arrived in Reykjavik for talks with their Icelandic counterparts on Friday

UK government sources are hopeful of a “constructive” settlement, but ministers face growing calls to provide firm guarantees to wholesale investors. In the latest sign that Britain’s financial sector could be hit by the Icelandic Chelsea Building Society revealed it has £55 million invested in the country. The deposit represents 1.5% of the society’s marketable assets, but Chelsea insisted that the situation “will not affect its ongoing business model.”

So far, there is no sign that the British Navy might be steaming toward Iceland — something that happened regularly from the 1950s to the ‘70s, when Britain and Iceland clashed over fishing rights. But the words being exchanged between London and Reykjavik are the most bellicose since the so-called cod wars.

This time, the dispute centers on money, not fish. Like several other European countries, Britain is trying to recover deposits stranded in Icelandic banks that failed in the last two weeks, as the country’s financial system collapsed. A delegation of British lawyers and regulatory officials was headed to Iceland on Friday. They were preceded by an army of Fleet Street reporters and photographers, seemingly on a mission to uncover the missing cash in every bank branch or bar in Reykjavik.

Britain may be the biggest and noisiest claimant, but it is not the only creditor feeling the effects of the collapse of the Icelandic financial system. Across Europe, countries, companies and consumers are scouring their portfolios and discovering exposure to Glitnir, Landsbanki and Kaupthing, the three main Icelandic banks, all of which have been taken over by the government.

On Friday, Erste Bank of Austria said it had 300 million euros, or $410 million, in senior debt at the Icelandic banks. Like other creditors, Erste has been left in the dark about when any talks on settling these debts might begin, Michael Mauritz, a spokesman for Erste Bank, said. “We and Brown, we are both in the same boat,” Mr. Mauritz said, referring to Prime Minister Gordon Brown of Britain. Mr. Mauritz said potential losses had been accounted for in a revised earnings outlook that Erste recently published. Still, the bank’s shares fell sharply Friday in Vienna, after a delay in the opening of the stock exchange there.

Another Austrian banking company, Raiffeisen Zentralbank, said it also had exposure to Icelandic banks, though it declined to say how much. A Raiffeisen spokesman, Andreas Ecker, told Reuters that the bank’s “capital base is continuously strong.” In Finland, the financial authorities said lenders had 210 million euros in exposure to Icelandic banks. By far the greatest rancor has surrounded ordinary bank deposits taken out by individuals, government organizations and charities.

They had sought to take advantage of what seemed like generous offers by the banks in Iceland, where interest rates and inflation have been running far ahead of levels in Continental Europe and Britain. To try to get their money back, now that the banks have gone bust, account holders have had to turn to domestic deposit insurance systems. The British government has pledged unlimited protections for individuals. The Netherlands, which had a delegation set to arrive in Iceland on Saturday, has said it would compensate savers up to 100,000 euros.

But British charities and local government organizations, which together had deposited more than £1 billion, or $1.7 billion, in Icelandic banks, are not so lucky. The British government says it will not cover the accounts but will provide help to individual municipalities that encounter trouble.

“There are no councils that will run out of money tomorrow or next week, but these are sizable amounts of money,” a spokesman for the Local Government Association said, insisting he not be identified because of the organization’s policy. Over all, the approximately £800 million that local governments had invested in Iceland is less than 1 percent of these organizations’ annual budgets, but a more sizable fraction of their financial reserves, which total £10 billion to £11 billion, the spokesman said.

While agreeing to compensate individual savers, the British government is not happy about it. Some accounts involved online banking operations like Landsbanki’s IceSave in Britain, which Britain says are subject to Icelandic deposit insurance procedures. That would mean that Iceland would be responsible for about £16,000 an account. As Icelandic bankers, regulators and politicians huddled to put the country’s financial system back together, Mr. Brown said there had been no indication that they would hand over the money, a situation he has characterized as “totally unacceptable and illegal.”

The British government has frozen the assets of Icelandic banks in Britain, and has threatened to use antiterrorist legislation to take over assets of other Icelandic companies in Britain. Mr. Brown’s comments on the situation have been “disconcerting,” the prime minister of Iceland, Geir H. Haarde, said at a news conference Friday. “We will honor our obligations, but we need some support from the U.K. authorities to do this in a proper way,” Mr. Haarde said. “Clearly, everyone needs to be a little bit flexible.”

He said he had spoken with the prime minister of Norway, Jens Stoltenberg, by telephone on Friday about the possibility of “increasing loan arrangements,” but Mr. Haarde provided no details. Analysts say Iceland probably will have to turn to the International Monetary Fund to raise the money needed to satisfy creditors. Despite the collapse of the banks, Mr. Haarde said, “the country itself is not in default, is not abrogating its responsibilities.”

“Iceland has never defaulted on a loan and will never default,” he said. Britain is not the only country to take action. Regulators in Germany said they had placed a “stoppage of disposals and payments” for the German branch of Kaupthing, the largest Icelandic bank, which the government took over this week. The Germany Financial Supervisory Authority said 31,000 Germans had accounts worth 308 million euros ($421 million) at Kaupthing.

British hospitals and universities were dragged into the row over the collapse of Iceland's banks after it emerged they face losing millions of pounds they invested in the country. Charities and housing associations also have money at risk in the tiny Arctic country, it was confirmed on Friday.

The revelations piled pressure on the Government to recover cash from Iceland or use taxpayers' money to compensate the growing number of bodies with investments in Iceland's collapsed banks. nLocal councils and police authorities have invested more than £1 billion of public money in Iceland and stand to lose out as the banks' liquidators give priority to paying off Icelandic creditors. Gordon Brown has threatened to seize the assets of Icelandic companies if British deposits are not returned.

A team of officials from the Treasury and the Bank of England arrived in Reykjavik for talks with their Icelandic counterparts. Government sources are hopeful of a "constructive" settlement, but ministers face growing calls to provide firm guarantees to wholesale investors. The Treasury has forced one bank unit, Kaupthing Edge, to transfer its deposits to ING, raising hopes that some investors will get their money back. And ministers have promised to cover individuals' deposits in Landsbanki, Glitnir and other Kaupthing units if Icelandic government adminstrators do not return the money.

But institutional investors have no such promise. Monitor, the Government agency that tracks NHS trusts' finances, said that two trusts had come forward to admit investing in Iceland. Monitor would not identify the trusts, but said their total exposure is around £2 million.Several universities also have money tied up in Iceland. The British Universities Finance Directors Group would not name the universities affected. But it said the sum at risk will be "millions in total, but not hundreds of millions."

The National Council for Voluntary Organisations estimates that British charities have over £120 million at risk. One charity, Cats Protection had £11.2 million of deposits in one of Kaupthing's British units. Charity leaders yesterday met Government ministers but were given no assurance that the taxpayer will cover their losses. In a statement afterwards, the charities said they will "continue to campaign for charities that have had exposure to Icelandic Banks for full coverage of the losses."

The National Housing Federation, which represents 1300 housing associations in England, said that some of its members had money deposited in Iceland. The group said it too is seeking a Government guarantee. Gavin Smart, assistant director at the National Housing Federation, said: "We are working to establish the level of housing associations' exposure to this problem and are asking the government to extend the same protection to housing associations as they have to individual investors."

More than 100 local councils and police authorities have invested more than £1 billion in Iceland, sparking criticism of their use of public money. Local government leaders argue that they could not have foreseen the country's troubles. But the Telegraph revealed yesterday that some local council officials ended their investments after credit ratings agencies cut the banks' ratings. And it was revealed that dozens of councils were explicitly warned to avoid Iceland by financial advisers as much as two-and-a-half years ago.

Arlingclose, an advisory firm based in London, advised its 45 local council clients to remove Icelandic institutions and their subsidiaries from their lending lists in early 2006, warning that the banks were financially "vulnerable". The firm also included that advice in tender documents it then presented to around 45 more councils over the last 18 months as it bid for their business. Several of the companies who met Arlingclose advisers and received a tender document advising them to avoid Iceland are understood to be on the list of councils who later invested money in the company. Mark Horsfield, a director of Arlingclose, said he was surprised so many councils had "ignored" the warning signs chosen to invest in Iceland.

Group of Seven finance chiefs, meeting after stocks plunged and as a global recession looms, vowed to prevent the collapse of major banks while failing to unveil new initiatives for thawing credit markets. "The current situation calls for urgent and exceptional action," the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to "take all necessary steps to unfreeze credit and money markets" without detailing how that would be accomplished.

Signaling they would intervene to avoid a repeat of last month's collapse of Lehman Brothers Holdings Inc., the officials promised to ensure major banks have access to cash and are able to tap public funds for capital. By refraining from specific fresh measures such as embracing a U.K. plan to guarantee loans between banks, they still run a risk of disappointing investors. "They've seen what Lehman did and the repercussions," said Jeff Pantages, chief investment officer at Alaska Permanent Capital Management in Anchorage, which oversees $2 billion. "If you're a bondholder, you've got to feel better. If you're a shareholder, you're not so sure."

A sign of the strains: The G-7 ministers today met with President George W. Bush, an echo of former President Bill Clinton's visit with the group in 1998 amid the Russian debt default and collapse of hedge fund Long Term "This is a serious global crisis and therefore requires a serious global response," Bush said at the White House. The Group of 20, which includes emerging markets such as Russia and China, convenes later.

Lehman's downfall precipitated the latest chapter of the 14- month crisis, causing banks to stop lending to each other out of concern they may not get their funds back. The G-7's willingness to now back "systematically important financial institutions" may provide some relief for Morgan Stanley, whose stocks and bonds dropped this week on concerns for its health.

U.S. Treasury Secretary Henry Paulson said no bank was singled out in the discussions yesterday. The policy makers from the U.S., Japan, Germany, U.K., France, Canada and Italy met after stock indexes this month plunged more than 20 percent from Japan to Europe to North America. That left them under pressure to roll out new policies and adopt a united front to quell the panic in markets after their previous steps failed to do so and appeared disjointed. Instead, they outlined principles for all nations to follow.

Measures taken should protect taxpayers and avoid "potentially damaging effects on other countries," the group said. In the past month, some European governments have taken unilateral actions to increase bank-deposit guarantees, spurring concern that savers would drain cash from nations with less protection. Paulson said it would be "naive" to think that different economies in different circumstances could come up with the same policy paths.

In the past two weeks, global central banks executed emergency interest-rate cuts and pumped more cash into markets, the Federal Reserve said it would buy commercial paper, European governments bailed out banks and the U.K. and U.S. said they would start taking equity stakes in financial companies. Money markets remain gridlocked even so, with the three-month London interbank offered rate climbing to 4.82 percent yesterday, a record premium over the Fed's benchmark rate. The seizure spurred British policy makers to propose a program to backstop loans between banks.

G-7 officials shied away from copying the U.K. idea, which would either turn central banks into clearing houses for banks' loans or have governments back the obligations. The jump in borrowing costs and restricted access to credit prompted Merrill Lynch & Co. to predict the G-7 economies next year will be the weakest since 1982. U.S. stocks fell for an eighth straight day yesterday, with the Dow Jones Industrial Average capping its worst week since 1914. The MSCI World Index of equities in 23 developed countries slid 20 percent this week, the most since records began in 1970.

Policy makers expressed confidence that investors will ultimately recognize the scale of initiatives under way, including a new U.S. plan to buy stocks in a "broad array" of financial companies. "We have taken a lot of actions," European Central Bank President Jean-Claude Trichet said. "It is normal that there is a maturing process."

Paulson signaled his top priority is to start buying financial stocks as soon as he can. "This is a plan that I'm quite confident will work," he said. The Treasury chief also said "we have more to do in the liquidity area." The American plan follows U.K. Prime Minister Gordon Brown's 50 billion pound ($87 billion) program that will partly nationalize at least eight lenders and provide 250 billion pounds of loan guarantees.

Canada's government yesterday moved to shore up its banks by saying it will buy as much as C$25 billion ($21.6 billion) in mortgages from them. German Finance Minister Peer Steinbrueck and Bundesbank President Axel Weber said they're working on a package of measures to rescue banks that'll be revealed before markets open next week. "The situation in financial markets is demanding unusual and far-reaching decisions from all policy makers," Weber said. "There is no alternative to these measures because banks have come under strong pressure."

European leaders will go beyond the G-7's agreements in shaping their own rescue package when they meet tomorrow in Paris for a second summit in as many weekends, French Finance Minister Christine Lagarde said. Europe's governments just a few weeks ago questioned the need for a strategy, arguing their banks were sound. While the G-7's joint statement made no mention of currencies, Trichet said the group viewed excess volatility in exchange rates as detrimental and urged China to allow faster gains in the yuan.

Rifts within the G-7 were exposed on two fronts yesterday. Lagarde blamed the U.S.'s decision to let Lehman go bankrupt for precipitating the crisis, while Italian Finance Minister Giulio Tremonti rejected a draft statement for being "too weak." The 266-word text that won his blessing was shorter than the original and aimed at wielding "a strong psychological impact," Lagarde said.

Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they "rewrite the rules of international finance."

"The idea of suspending the markets for the time it takes to rewrite the rules is being discussed," Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis "can't just be for one country, or even just for Europe, but global."

Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisis "in coming days," he said.

Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are "talking about a new Bretton Woods." The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II in a hotel in Bretton Woods, New Hampshire.

The aim of the agreements was to establish a monetary management system, initially by pegging currencies to gold. The IMF was set up later to help manage the international financial system.

U.S. Treasury Secretary Henry Paulson indicated that pumping government funds into banks is a priority and said financial markets will remain volatile. "We see the need -- a clear, present need -- to raise capital," Paulson said yesterday at a press conference after a meeting in Washington of finance ministers and central bankers from Group of Seven countries. The purchases of stock, the newest part of a rescue plan engineered by Paulson, would be aimed at sustaining banks and other financial institutions through the worst credit crisis in seven decades.

The U.S. Congress last week passed legislation allowing the Treasury secretary to spend as much as $700 billion to buy mortgage securities and other troubled assets and to purchase equity in banks. Paulson declined yesterday to give a timetable or details about the purchases. "We're going to do it as soon as we can do it and do it properly and do it effectively and right," Paulson said. "Trust me, we are not wasting time; people are working around the clock to deal with this."

Paulson would be following U.K. Prime Minister Gordon Brown's plan to help beleaguered banks in that country. Brown is pursuing a 50 billion pound ($87 billion) program that partly nationalizes at least eight lenders. Neel Kashkari, the Treasury official Paulson picked to manage the rescue operations, is scheduled to give a speech Oct. 13 to discuss the way forward. Falling home prices and illiquid securities tied to mortgages in the past 14 months led to the collapse of some of the country's biggest financial firms and to takeovers by the Treasury of American International Group Inc. and Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies.

Under the equity purchase program, the Treasury would not be involved in bank management, Paulson said. Equity purchases would take place alongside Treasury's coming program of "broad" mortgage asset purchases, he said. The Treasury is "working to develop a standardized program that is open to a broad array of financial institutions," Paulson said. "Such a program would be designed to encourage the raising of new private capital to complement public capital."

Buying senior preferred shares of non-voting stock from financial companies is "the quickest way to inject liquidity into the markets, get credit flowing again and protect the taxpayer at the same time," Senator Bob Corker, a Republican from Tennessee on the banking committee, said yesterday in a statement.

The International Monetary Fund earlier this week said banks around the world would need $675 billion in fresh capital in the next several years to recover from the credit crisis. The IMF also raised its estimate of losses tied to U.S. loans and securitized assets to $1.4 trillion -- roughly half of which have already been written down or recognized as losses. Paulson declined to say how Treasury would divide the $700 billion toward purchases of troubled assets and injections of equity capital. "I am not prepared to say anything today with the kind of detail as to relative sizes of the two efforts," he said.

"Any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market-standard terms to protect our rights as investors," Paulson said. The Dow Jones Industrial Average posted its biggest weekly drop in the history of the 30-stock average as officials from the U.S., Japan, Germany, U.K., France, Canada and Italy met for the first time since the financial crisis spread last month. Stocks in Europe and Japan had the biggest weekly drop in at least 21 years. "We'll have some volatility for a while" Paulson said. "We need to restore confidence."

In what may shape up to be the most expensive payout ever in the credit-default swap market, sellers of insurance against a debt default by Lehman Brothers will have to pay 91.375 cents on the dollar to settle the contracts.

The results of a settlement auction held Friday imply that banks, hedge funds, insurance companies and other writers of the insurance-like swaps would have to come up with as much as $365 billion for buyers of the protection. But many of the firms on the hook may have taken steps to offset their obligations, which could minimize the blow, industry experts said.

Swaps are basically insurance policies bought by investors to protect against an investment such as a corporate bond losing all value if the company falls apart. The unregulated nature of the market, in which investors essentially bet on the likelihood of a default by a bond issuer, makes it impossible to say who owes how much to whom. But it is safe to say that selling default protection through the swaps turned out to be costlier than anticipated.

The price of the Lehman bonds underlying the swaps was settled at auction at 8.625 cents on the dollar, which is subtracted from 100 to get the payout ratio for the swaps. Bond traders had recently quoted Lehman's debt at about 13 cents on the dollar, which protection sellers might have been using as a proxy before the auction to estimate how much they owed their counter-parties.

"For all the people who are sellers of protection who didn't have hedges themselves, they're paying more than they thought they were going to pay," said Joel Telpner, an attorney at Mayer Brown in New York who specializes in credit derivatives transactions.

Credit-default swaps, initially used by bondholders that wanted to offset the risk of their investments, evolved in recent years into a $55 trillion market that frequently attracted speculators who simply placed bets on the derivatives' value, and never actually owned the debt underlying the contracts. The swaps were at the center of the government's bailout of AIG, which needed a loan to meet collateral calls on credit derivatives.

Last month's bankruptcy by Lehman, which had been the nation's fourth-largest securities firm, has raised concern that firms might not be able to cover credit-default swaps written on about $400 billion of Lehman bonds. But firms with exposure to swaps frequently hedge their bets to limit their risks.

"If we see defaults from the standpoint that protection sellers don't pay up, then we're going to have a huge problem in the market," Telpner said. "But we don't have any explicit evidence indicating that sellers ultimately are not going to be able to pay the amounts owed to buyers."

Auctions earlier this month to unwind Fannie Mae and Freddie Mac credit derivatives resulted in much lower settlement amounts, south of 10 cents on the dollar. That's because a government bailout of the mortgage-finance companies helped preserve the value of their bonds, making default protection less valuable.

The International Swaps and Derivatives, a private industry group, has overseen more than a dozen auctions to unwind credit-default swap contracts when "triggering events" have occurred. Several more auctions are on tap as investors try to unwind swaps involving Washington Mutual and several Icelandic banks caught up in their country's credit crisis.

The brief history of credit derivative settlement auctions has primarily involved swaps related to bond issuers that needed to restructure themselves. The Lehman auction represented a new frontier for the market because the securities firm is not reorganizing -- it is liquidating.

The auction-settled price of 8.625 cents on the dollar for Lehman's bonds is not necessarily indicative of the recovery amounts that bondholders can expect in Lehman's bankruptcy proceedings. More than 350 firms signed up to participate in the Lehman auction, which was run by Creditex Group and Markit Group.

Illinois and Michigan banks with $123 million in deposits were closed by state regulators as tightening credit and a deepening real-estate slump pushes failures this year to 15, the most since 1993. Meridian Bank of Eldred, Illinois, with $39 million in assets and $37 million in deposits, was shut by the state yesterday and National Bank of Hillsboro, Illinois, bought the deposits from the Federal Deposit Insurance Corp. Four branches in southern and western Illinois reopen today, a fifth opens Oct. 14, the FDIC said in a statement.

Main Street Bank of Northville, Michigan, with $98 million in assets and $86 million in deposits, was turned over to the FDIC yesterday. Monroe Bank & Trust of Monroe, Michigan, bought the deposits and today will open its two offices near Detroit as branches. "The dramatic downturn in the residential real estate market unfortunately knocked the wind" out of Main Street, Ken Ross, commissioner of Michigan's Office of Financial and Insurance Regulation, said in a statement.

Regulators have now closed the most banks in 15 years, and the collapses of Washington Mutual Inc. and IndyMac Bancorp Inc. were among the biggest in history. The housing slump and tight credit led to enactment of a $700 billion bank rescue plan, and triggered a bankruptcy by Lehman Brothers Holdings Inc. and nationalization of Fannie Mae and Freddie Mac.

The FDIC said Main Street, based 25 miles west of Detroit, will cost the deposit insurance fund $33 million to $39 million and closing Meridian will cost $13 million to $14.5 million. The fund had $45.2 billion at the end of the second quarter. In Michigan, Monroe Bank agreed to pay a premium of 1 percent for Main Street's deposits, the FDIC said. Monroe also will buy about $16.9 million in assets and has a 90-day option to acquire $1.1 million additional assets of the failed bank.

National Bank will purchase about $7.5 million of Meridian's assets and didn't pay the FDIC a premium for the right to assume all of the failed bank's assets, the FDIC said. The FDIC retains the remaining assets. Meridian's four offices in the Illinois towns of Altamont, Carlyle and Eldred will open today, the Alton office near St. Louis reopens Oct. 14, the FDIC said. All depositors of Main Street and Meridian will have uninterrupted access to their money, which will continue to be insured, the FDIC said.

The FDIC insures deposits of up to $250,000 per depositor per bank and a similar amount for some retirement accounts at 8,451 institutions with $13.3 trillion in assets. The agency is doubling the premiums banks pay to replenish the reserves amid forecasts failures through 2013 will cost almost $40 billion. Washington Mutual, the biggest savings and loan, sold its assets to JPMorgan Chase & Co. Sept. 25 after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp., the sixth-biggest bank, agreed to be acquired by Wells Fargo & Co. for $11.7 billion, trumping an FDIC-brokered sale of banking operations to Citigroup Inc.

The FDIC is running a successor to California lender IndyMac Bancorp, closed in July in the fourth-largest bank seizure, and easing mortgage terms for more than 1,200 borrowers. The failure drained more than 10 percent from the U.S. insurance fund. The agency in August said 117 banks were classified as "problem" in the second quarter, a 30 percent jump from the first quarter. The agency doesn't name the "problem" lenders.

Before today's action, 39 banks failed since October 2000, according to a list at fdic.gov. Regulators this year also closed Ameribank in Northfork, West Virginia, on Sept. 19; Silver State Bank of Henderson, Nevada, on Sept. 5; Integrity Bank of Alpharetta, Georgia, Columbian Bank and Trust of Topeka, Kansas, and First Priority Bank of Bradenton, Florida, in August; Reno-based First National Bank of Nevada and Newport Beach, California-based First Heritage Bank in July; Staples, Minnesota-based First Integrity Bank and ANB Financial in Bentonville, Arkansas, in May; Hume Bank in Hume, Missouri, in March; and Douglass National Bank in Kansas City, Missouri, in January.

General Motors Corp. is in preliminary talks with Cerberus Capital Management LP's Chrysler LLC about a possible merger or other partnership, a person familiar with the talks said.

The talks are very early and it's not clear whether they will result in any agreement, said the person, who asked not to be named because the discussions are private. The New York Times reported the talks yesterday and said Cerberus is also holding talks with automakers including Nissan Motor Co. and Renault SA, citing unidentified people.

GM, which hasn't made money since 2004, and Chrysler, which has said it won't be profitable this year, are under pressure to cut costs and increase liquidity as U.S. auto sales have fallen to the lowest since 1991 and the credit crunch, touched off by the bankruptcy of Lehman Brothers Holding Holdings Inc., is making it harder for customers and dealers to get loans.

A combination of GM, which sold 9.4 million units last year, and Chrysler, with 2.7 million, would cement GM's lead over Toyota Motor Corp. as the world's largest automaker. GM beat Toyota by only about 3,000 cars and trucks last year and Toyota led by 278,000 in the first half of this year.

GM's U.S. sales fell 18 percent in the first nine months of this year and Chrysler's sales have declined 25 percent in its home market. Both automakers are losing sales as first rising fuel prices and then a credit crunch have curtailed demand. Shares of Detroit-based GM have tumbled 80 percent this year, valuing the company at $2.8 billion. GM rose 13 cents, or 2.7 percent, to $4.89 in New York Stock Exchange composite trading yesterday, its first advance since Sept. 30. Chrysler, the No. 3 U.S.-based automaker, is closely held.

New York-based Cerberus said last month that it was trying to buy the 19.9 percent of Chrysler that is still owned by Daimler AG. Daimler wrote down the value of its Chrysler stake at the end of June to 171 million euros ($230 million) from 916 million euros at the end of 2007 as the automaker's fortunes declined. Chrysler said Sept. 25 it will fire about 250 employees as part of a plan to eliminate 1,000 salaried positions by the end of last month. Chrysler said in August that it is trying to sell its Viper sports car brand.

Chrysler, which isn't required to report financial information, has said it won't be profitable in 2008. The company said that through June, it earned $1.1 billion before interest, taxes, depreciation and amortization. GM and Chrysler also discussed a merger in 2007, people familiar with those talks said at the time. Daimler Chief Executive Officer Dieter Zetsche confirmed in March of that year that the two automakers were in talks about developing models together. Daimler instead sold the majority of the company to Cerberus.

Chrysler already assembles minivans for Germany's Volkswagen AG in Canada and is scheduled to build a pickup for Nissan Motor Co. in 2011. Chrysler said in August that it had preliminary talks with Fiat SpA about building vehicles in North America for the Italian carmaker. Chrysler has also announced plans for sedans developed with Nissan and China's Chery Automobile Co.

Standard & Poor's analyst Robert Schulz said yesterday that GM, Ford Motor Co. and Chrysler may be forced into bankruptcy as the global credit freeze damps U.S. sales. "Macro factors could overwhelm them at some point" even as GM, Ford and Chrysler vow to stick with their turnaround plans, Schulz, S&P's lead automotive credit analyst, said yesterday in a Bloomberg Television interview in New York. The companies said they have no plans to seek bankruptcy protection. With all three companies working to boost cash, any bankruptcy filing would be a last resort, not a "strategic" decision, Schulz said.

"We don't see that as something they would choose," he said. Schulz said the "trigger" for a forced restructuring under bankruptcy protection would be based on the automakers' ability to preserve liquidity as sales decline. Industrywide U.S. sales slid 27 percent last month, the most in 17 years. Sumitomo Corp. and Tata Motors Ltd. are among the potential buyers for shares in Mazda Motor Corp. that Ford is trying to sell, Nikkei English News today reported, without saying where it obtained information.

Ford, which owns a third of the Japanese automaker, is considering selling some of those shares to raise funds, Nikkei said. A Mazda executive acknowledged the company is preparing for a potential sale by Ford, Nikkei said, adding that Japanese competitors are unlikely to buy the shares. State-run broadcaster NHK earlier reported that Ford asked Japanese companies to buy Mazda shares from it.

Mazda has nothing to announce, according to a statement the carmaker released in Tokyo today. Ford's relationship with Mazda "hasn't changed," Ford spokesman Mark Truby said in an e-mailed comment today. The company doesn't comment on speculation, he said. Ford dropped 9 cents, or 4.3 percent, to $1.99 yesterday, its lowest since Oct. 5, 1982. The stock has declined 70 percent this year, valuing the company at $4.5 billion.

Operating-cash needs at GM, Ford and Chrysler are "substantial, so if it looked like they were going to be pushing toward that number because of these operating losses and cash usage, that's sort of the point where they'd have to consider" bankruptcy, Schulz said. S&P said that Oct. 9 its debt ratings for GM and Ford, already at six steps below investment grade at B-, may be lowered again because the automakers face a "serious challenge" in 2009.

Barclays Capital reduced its target stock price for GM to $4 yesterday, with analyst Brian Johnson in Chicago citing dwindling global auto demand. "With auto sales stalled in the U.S. and beginning to contract in the rest of the world, we believe GM's cash needs are increasing," Johnson wrote in a note. "Moreover, the downside risk of greater decline in worldwide auto sales driving greater cash needs is increasing."

Savers could become biggest losers from the financial crisis, with interest rates below the level of inflation for the first time in 27 years. With the Bank of England slashing base rates on Wednesday from 5 per cent to 4.5 per cent, this is the first time base rates have been below the rate of inflation since 1981 – the depths of the recession overseen by the then chancellor Geoffrey Howe. Inflation, as measured by the consumer price index, is running at 4.7 per cent - 0.2 percentage points higher than interest rates. Financial experts warned that it means savers – unless they are canny – will suffer from their hard-earned deposits being undermined.

If a saver deposits £10,000 in an account earning 4.5 percent, they will end up with interest of £450 at the end of the year. However, tax of 40 per cent – £180 – will have to be paid by a higher rate tax payer. This leaves the saver with £10,270. That sum, however, can not buy the same goods that £10,000 could do at the start of the year. That's because, over the course of 12 months, inflation of 4.7 per cent will have caused the prices of £10,000-worth of goods to increase to £10,470.

Ruth Lea, economic advisor to the Arbuthnot Banking Group, said: "Negative real inflation rates are terrible for savers. The last time it happened for a prolonged period of time was in the late 1970s and no one bothered to save, and why would you?" Defaqto, the financial research house, calculates that of the 449 instant access savings rates on the market, not a single one pays out a good enough rate for a higher-rate taxpayer to make a "real" return on their savings. Just 10 per cent of accounts are generous enough for basic-rate taxpayers to see a return on their investment.

Charles Davis, economist at the think tank Centre for Economics and Business Research, said the state of Britain's savings was "horrific" with official figures suggesting that savers were – for the first time since Harold Macmillan's premiership – dipping into their deposits to fund the every day cost of living. "Saving levels have to pick up. They just can't afford to borrow any more," he said.

There, however, two bright spots for savers. The majority of economists believe inflation levels will fall sharply next year, as the price of oil tumbles. Also – though the average savings rate is a poor 2.46 per cent, according to the Bank of England – there are a small number of very good accounts available, as banks try to attract new customers' deposits to bolster their balance sheets. Both Alliance & Leicester and Coventry Building Society offer instant access savings accounts with interest rates of 6.6 per cent.

They exist also in Zürich: "Masters of the Universe." You can recognize these money-moguls from their swanky rides -- their Porsches, their Audis, their BMWs. And yet recently these chariots of high finance have been spotted being sold to auto dealers at fire-sale prices -- a sure sign that the bank crisis has arrived here too.

"First and foremost it is the financial center of Switzerland that will bleed," prophecies Beat Bernet, bank expert at the University of St. Gallen. By now people are even contemplating the unthinkable: the collapse of Europe's leading bank, the largest money manager in the world, UBS. The Swiss have been forced once already to wave goodbye to a national icon. Swissair, whose solidity earned it the moniker "the flying bank," shut down in 2001. It was a traumatic crash-landing for the whole country, and Swissair's collapse cost the state over 2 billion Swiss francs (€1.3 billion).

The big banks also bore guilt for the failure. As later became public, UBS had refused to extend funding to Swissair for emergency operations. This is how the bank earned its nasty nickname among the populace, "United Bandits of Switzerland." Now, UBS is once again in the hotseat. Since the financial crisis began, the firm has experienced heavy losses and has seen writedowns of 45 billion Swiss francs (€29 billion). The investment bankers on Wall Street allowed themselves to run riot, above all with the meagre savings of small deposit-holders. UBS announced last week it was cutting 2,000 investment banking jobs.

As the Neue Zürcher Zeitung recently put it -- with refreshing openness -- "the nicest thing you can say about the American bankers -- and about their imitators as UBS -- is that they were unscrupulous." Many are fearful of the consequences should UBS capsize. Switzerland's gross domestic product totals 512 billion Swiss francs (€332.1 billion). UBS's balance sheet adds up to 2 trillion Swiss francs (€1.3 trillion) -- four times as much. Even Switzerland's second biggest bank, Credit Suisse, oversees assets totalling 1.2 trillion Swiss francs (€778.4 billion). Together UBS and Credit Suisse have over 640 billion Swiss francs (€415.1 billion) in outstanding loans.

"We owe this crisis an uncomfortable revelation: UBS and Credit Suisse are too big for Switzerland," wrote the ex-editor-in-chief of the German weekly Die Zeit, Roger de Weck, last week in the Swiss periodical Das Magazin. "If they went bankrupt, a flourishing country would be ruined." Swiss Economics Minister Doris Leuthard on Thursday told a Swiss radio station that "we in no way would want one of our big banks to find itself in a serious crisis that might lead to bankruptcy. The federal government would absolutely prevent that." James Nason, spokesman for the Swiss Bankers Association, told the Associated Press on Thursday that "we don't see any sign of a banking crisis. The Swiss financial center is proving to be remarkably resilient."

Still, apart from the mini-states of Liechtenstein and Luxembourg -- and, of course, Iceland -- no country in Europe is as dependent on banks and insurance companies as Switzerland: Eighteen percent of its gross domestic product comes from the financial sector. In the UK and the US it's seven and five percent, respectively. The Swiss finance industry employs about 100,000 people; over half of these work for one of the two banking giants. When it comes to the country's savings deposits, the two banks command a combined market share of 80 percent.

In the meantime, Zürich has begun to feel the first shock waves from the banking tsunami. Switzerland's largest city is at the mercy of its banks: For the almost 400,000 people who live there, 42,000 of their jobs come from the financial sector. Last year the finance industry paid around a third of the city's taxes. The champagne years are over: For 2008 and the next two years the banking metropolis projects a tax shortfall of well over half a billion Swiss francs. That would put one of the richest cities in the world firmly in the red.

And until Thursday, the Swiss government had said remarkably little about the developing crisis. Last week, as banks faltered around the world and governments wrung their hands to find solutions, the Swiss capital remained uncannily quiet. "The Global Economy is Staring into an Abyss. Bern Remains Silent," ran the angry headline from the Swiss newspaper NZZ am Sonntag. Unlike in other countries, where at least the puny protection limits on individual deposits has been boosted, here people prefer to put their trust in God and in their banks. A laughable four billion Swiss francs (€2.6 billion) per bankruptcy is the upper limit of protection guaranteed by the government. In the meantime the state-owned Canton banks are enjoying a surge in customers.

Finally on Tuesday came a special meeting. The government declared itself "worried," but determined the state of the banks to be "secure overall," according to Justice Minister Eveline Widmer-Schlumpf. On Wednesday the Swiss Central Bank took part in a collective move with other central banks and lowered their prime interest rate. And ultimately there is a plan B: should UBS really go under, a secret agreement would certainly come into effect and the ECB would spring to its aid. So much for Switzerland's proud independence.

Pentagon officials have prepared a new estimate for defense spending that is $450 billion more over the next five years than previously announced figures. The new estimate, which the Pentagon plans to release shortly before President Bush leaves office, would serve as a marker for the new president and is meant to place pressure on him to either drastically increase the size of the defense budget or defend any reluctance to do so, according to several former senior budget officials who are close to the discussions.

Experts note that releasing such documents in the twilight of an administration is a well-worn tactic, and that incoming presidents often disregard such guidance in order to pursue their own priorities. And with the nation’s economy caught up in a global financial meltdown, it remains unclear whether either Sen. John McCain , R-Ariz., Sen. Barack Obama , D-Ill., or a Democratic Congress would support such large increases for defense next year.

“This is a political document,” said one former senior budget official, who spoke on the condition of anonymity. “It sets up the new administration immediately to have to make a decision of how to deal with the perception that they are either cutting defense or adding to it.”Dov Zakheim, the Pentagon’s top budget official from 2001 to 2004, who is not involved in the current discussions, agreed. “The thinking behind it is pretty straightforward,” Zakheim said. “They are setting a baseline for a new administration that then will have to defend cutting it.”

The fiscal 2010 portion of the estimate includes a $57 billion increase, out of which $30 billion would go for a vaguely defined contingency fund and $14 billion would go for replacing or fixing existing equipment, called reset, and modernization, the former officials said. They added that those items reflect the Pentagon’s attempt to anticipate the end of huge supplemental war allotments that have hidden the costs of resetting and modernizing the nation’s war-torn force. Both presidential candidates have pledged to scale back supplemental war spending.

The Pentagon comptroller’s office refused repeated requests for comment on the figures outlined by the former officials stating that it was premature to discuss future budgets because they were still being worked on. The new budget numbers reflect the Defense Department’s acknowledgement that the coming bow wave of ever-rising procurement costs, combined with the nonstop growth of defense entitlement spending, will render its already record- high budgets grossly insufficient in the years ahead.

But the numbers also seem to condradict the National Defense Strategy released recently by Defense Secretary Robert M. Gates , which called for tough tradeoffs in spending in an environment of limited resources. “We cannot do everything, or function equally well across the spectrum of conflict. Ultimately we must make choices,” Gates wrote. The new estimate, which has not been publicly released, would raise the fiscal 2010 budget number announced by the administration this year from $527 billion to $584 billion, not counting operations costs for the ongoing wars.

Money to prosecute the ongoing wars is not included in the new estimate, meaning the military would still need significant supplemental appropriations in addition to the increased budget request. Supplemental appropriations have been used to fund procurement and personnel costs that are predictable and therefore should be placed into the regular budget, said Admiral Michael Mullen, the chairman of the Joint Chiefs of Staff.

“We’re going to have to figure out how to get off supplementals,” Mullen told a group of Washington reporters Thursday. “My strategic approach is to start to implant those things that are in supplementals that we think we’ve got to have into the baseline budget. We need to start doing that. We’re working our way through the next budget now.” While reset and modernization funds in the new estimate are relatively non-controversial, the $30 billion contingency fund could face stiff opposition on Capitol Hill. That money, if approved, would be available to rapidly deploy active duty forces overseas in the event of an unexpected crisis.

In 2001 and 2002, lawmakers rejected attempts by Pentagon leaders to secure a contingency fund, from which they could draw money without requesting additional permission from Congress. “The Congress always saw this from their perspective as a slush fund,” said Zakheim, “Whereas the defense department has said it needed this kind of money because it could never project what exactly would be needed in the event of an emergency.”

The candidates differ on whether or not large increases in overall defense budgets are wise or even doable. McCain has promised to freeze all discretionary spending except for national security, and is pushing for an additional 150,000 troops above current plans, to be paid for within the base budget. Obama only supports the current planned increase of 92,000 Army and Marine Corps personnel. Both candidates have called for a wholesale reform of the Pentagon’s acquisitions system in an effort to control procurement costs, which have ballooned in recent years due to mismanagement.

“The practical fact is that these programs can’t all go into production without a very significant increase in the resources for defense, and I don’t think in light of the current fiscal situation that’s going to be possible,” said former Air Force Secretary Whit Peters, who advises Obama. Supplemental spending bills, which have funded most of the $859 billion appropriated for the Iraq and Afghanistan and global operations to counter terrorism since 2001, are set to be scaled back no matter which candidate wins in November.

“I see the future of supplementals as dramatically reduced to genuinely unanticipated needs, like fluctuations in the price of fuel, not programmatic costs or known spending needs,” said McCain in written responses to questions submitted by CQ. “It’s a bad way to do business, and I will bring it to an end.” Peters agreed that large supplemental spending packages would end. “The supplementals have confused things tremendously,” he said, adding that Obama realizes some of the items in the supplementals will have to be folded back into the base budget.

Exactly how the Pentagon’s new spending estimate will be communicated to Congress or the incoming administration remains unclear.In April, the White House Office of Management and Budget sent out guidance to all federal agencies that there would be no full budget drill this fall and no formal fiscal 2010 budget submission. All agencies were directed to project future budgets based on current costs, which OMB will then compile into a budget database. But since OMB won’t go through a formal scrubbing process for the submissions as it has done in previous years, it will be up to the next president to decide what to do with the numbers.

“The 2010 budget will be submitted by the next president, not the current president,” said OMB spokeswoman Corinne Hirsch. “This administration will certainly be sharing its priorities with the incoming administration in a variety of ways, but that will be outside the formal budget process.” Hirsch said OMB had not received the defense department’s numbers yet, although an OMB memo had said they were due in September.

“What is clear is that these additional funds that the Pentagon wants to include in their budget and their five year plan are way beyond the fiscal guidance that OMB gave the department of defense earlier this year,” one former official explained. Moreover, the new numbers are not aligned with any long-term strategic or budgetary rationale that might allow OMB or Congress to judge their wisdom or their impact on the nation’s worsening economic situation, the official said. “The idea that the Pentagon Comptroller’s office wanted these additional funds has been fairly well known,” the former official said. “But there is little out there to give anybody the understanding of why.”

That the pentagon would push its way to the head of the line for funds is no surprise.I am hoping Obama has his own version of Rumsfeild whos job will be dismantling the military part of the mil-industrial complex...How many alt-fueled vehicles can a tank factory build anyway?...

Some folks are going to have to get it through their pointy heads that we are BROKE...no more star wars gizmos guys...

I think a discussion is needed of just how big of a military we need is in order...As a first step to a change from a empire to just another country...

There is a part of me that is totally convinced this was planned..at the top...

And I am starting to doubt we will have a election...

Should we fail to have a election,for any reason,nothing anyone could say would convince me that it was not planned.

"$5 trillion vanished from the stock markets in one week, and I bet you, there’ll still be folks talking about (hyper-)inflation. Who needs logic anymore to make sense of the world around us? When faith can do it?"

Indeed, well said. "Inflation" is one of the first words out of many a mouth. I'm at my ten-year high school reunion this weekend, and only one of my classmates that I've spoken with got out of the way of this trainwreck. He is of the Austrian school, and is a smart guy...

My father-in-law still thinks the bug-a-boo of inflation is a realistic threat to investments right now. And my dad was worried about "the negative rate on treasuries once inflation is factored in". I tried to dissuade them from this line of thought, but inflationary fears are DEEPLY ingrained. What's is going to take to wake them up? Falling prices on gas? (I know that gas prices and inflaiton/deflation are not the same thing, but in their minds the two are the same thing as far as I can gather) Falling gasoline prices are already happening as I write. I guess their whole lives have been lived (they're both 55-60) in inflationary times so changing that perspective is difficult.

Oh well. After the last two weeks they do get that life is going to change and their retirement plans will be "different than expected". I've had a number of people tell me they wish now they'd listened to what I had to say.

I wish they had too, but even more I wish I were wrong in my assesment of how bad things could get. Now I have confirmation from the world at large that things are headed in a tough direction, and that life is going to change A LOT over the next few years. I keep hoping I'm wrong on just how rapidly things will change, but I'm certainly not planning on it.

From the F&F Bloomberg article above: Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential.

And from a Market Watch article about the IMF warning of a global financial meltdown: On Friday, U.S. Treasury Secretary Henry Paulson said his staff was working as quickly as they could to implement a plan to recapitalize important U.S. financial institutions. Paulson was able to provide few details, however.

Is there any legal process or transparency to any of this??? Shouldn't we all be marching in the streets across America?

The following is a comment made at Calculated Risk. I would be interested in getting others' opinions (esp Ilargi/Stoneleigh) on the ideas it expresses and their implications.

Earlier in the previous Volker thread a comment was made that a return to the Gold standard was "never going to happen" I disagree:

As recently as Yesterday, Merkel suggested that she wants out of the Euro. She is not going to tow the line any longer and Germany will be the first to abandon the Euro for a newer-D Mark or North EU Type "Gold-backed " Euro.

Expect a split in the EU into two factions of those EU Countries that are using the Euro as its currency.

Call it the Latin Euro and the Northern Europe Euro.

France and Germany will most likely revive the Franc and the D. Mark respectively as a companion currency alongside the Northern Europe Euro currency as a back-up. Both will be accepted currencies until a final determination is made on the longevity of any common Northern Euro currency.

Russia has already begun formal discussions on a Gold backed Rouble and given their immense Natural Resources reserves and the build-up of their Gold mining investments over the course of the last 10 years it will be a very easy switch for them.

Argentina and Brazil have already broken form the USD Reserve for settling trade accounts between each country. This was adopted over the Summer and went off with out a hitch.China has been building it gold reserves and is now the largest sovereign nation invested in African Gold Mining, as well as oil exploration in Canada, and the Caribbean (Cuba).

What should concern the US and the UK the most is that no inclusion of the USD as a reserve currency going forward or the pound sterling as a benchmark currency for European Trade is being considered on a going forward basis.

What we are witnessing is a stern demand by BIS and stronger EU nations like Germany to Paulson, that the toxic bonds need to be repatriated to explode on American soil. The dollar rally is nothing more than the closeout of that debt being settled after which the USD will most likely shed 30%-50% of it value in a stunningly short amount of time. Months not years.

Don't underestimate Gold in the new World order. Just go out and try to buy some physical bullion today. Every Sovereign Mint in the world has either stopped or dramatically suspended any sales to the Public. And Every Central Bank has publicly said that it has suspend any future sales. The Paper futures manipulation on COMEX and LME are about to implode, as no Physical deliveries can be made on contracts the demand delivery at settlement. This may occur before the month is out.MW | 10.11.08 - 9:33 am | #

Please remember that there are trillions of dollars "worth of assets" sitting on banks' balance sheets that fall into the same category as the Lehman paper that was sold at 8 cents on the buck, and even that sale was rigged.

Our economies are being "financed" with double or nothing Ponzi bets. Much of what is counted as value today is nothing but paper that has already been proven to have no value.

"try to work as long as I can, be kicked out of the job market anyway, and live with/sponge off my children/younger relatives while feeling like a burden, and resenting it even while they resent me too."

"work til you die" is simply too optimistic ...

After all that was what families were for until we dismantled them in the age of oil prosperity for independence, freedom, and too many houses.

Nouriel Roubini was the single guest from 8-9:00 am today of the C-Span 1 call-in program Washington Journal. He was magnificent. Only criticism I could find was that he may still be underestimating the magnitude of the catastrophe. If Obama were not bought and paid for,Roubini would be a hands down choice for the new Secretary of the Treasury. If you can catch the rerun or a web broadcast of this hour, you will not be disappointed. The call-in public was surprisingly well informed

Yup younger folk living with older folk because they can't afford a house/apartment on their own is definitely a classic part of the older inter-generational negotiations, before families went nuclear.

Of course, having to live with one's parents because you can't afford a house when there are empty houses all around, because even with massive overstock the house prices still aren't falling fast enough, well that's its own problem. Around here they'd far rather demolish an empty house, or arrange a fire, than let a young family into it cheap. Keeps out the goths and the trailer trash, and helps keep home prices up dontcha know.

Sorry, I cannot provide any verification for any of the ideas suggested in the post that I pasted here. My intent in posting wasn't intended to suggest that I was advocating the positions outlined, but to ask those with a better understanding what merit they might have.

Your comment, fb, about splitting the Euro as being a silly notion, is the kind of conclusion that I could not reach on my own, so I must thank you.

I guess I am personally more interested in the potential loss of value of the US dollar and the role that gold may be playing in various regions of the world. Is what the author says about Russia and China plausible, and what are the potential ramifications?

El Polo, I don't know why the price of gold is where it is now relative to its previous highs. In light of the information presented by the poster I quoted, I find it somewhat curious that a major seller of gold in North America (Kitco) has now such a limited offering of physical precious metals for sale. Is this simply a because they are running short of stock at the moment or might there be some connection to some larger politico-economic forces?

Unless we are players, and I surely am not, we don't really know what direction our "masters" have in mind for us plebians. People like Ilargi and Stoneleigh have, to my mind, both a broader and longer vision than do most of us. The ideas underlying that post intrigued me; I hope that they might shed their insight on them.

About the same time Lehman Brothers filed for bankruptcy and the Dow Jones industrial average began plummeting last month, one of the nation's leading sellers of safes started to see an increase in sales.

The movements in the Gold Price are very interesting indeed. My first observation is that comments in the media are always focused on very short term fluctuations and only appear in these reports if they underline the general message, i.e stocks are down and gold is up. The media is very seldom reporting about the more interesting trends: Why is Gold still trading below 1000 USD if everybody is frantically trying to buy physical gold? Who is selling so much Gold in a single day that prices can fall more than 100 USD/ounce when the rest of the world is trying to buy gold?

There is a huge amount of opinions on the net attributing this to the secret influence of some unknown powers that try to hold the Gold price low. I´m not so sure about this theory. My current theory goes like this: Gold is supposed to be a hedge against bad times so the Gold price is low in good times and high in bad times. Looking at the Gold price over the the last few years this is not true. The Gold price has constantly gone up since 2003 together with the amount of the funny money created in the last few years. So I think people who had access to a lot of the funny money bought Gold over the last few years as a hedge against some of their trades. As we know now a lot of people in the financial markets are in trouble and I think a lot of them are forced to sell the Gold in order to have enough liquidity to survive. If there are enough people in the future getting into trouble and then forced to sell it the price might decline even with all the little people trying to buy all the gold they can. Just depends on who owns how much Gold and who might be forced to sell it off.

I would be very interested to see some numbers on how much Gold is owned by the hedge funds in this world. That could give some indication on how much Gold will enter the market if a certain percentage of the hedge funds is failing.

Another interesting trend is the current all time high of the Gold price if valued in Euro. That is so thanks to the recent drop of the Euro exchange rate to the Dollar. So there is a interesting constellation that Gold in USD is trading 10 to 20 percent below all time high and Gold in Euro is at all time high. That should create different views on buying/selling Gold on the two sides of the Atlantic Ocean.

This is a "high class" blog. By high class, I am not referring to socioeconomic status, but rather respect, intelligence, academic honesty, rational debate, compassion, community, and several other qualities which Hank Paulson or Dick Fuld do not represent as poster boys. While my style can often tend to the crude and sardonic, I do try to keep to these principles.

When you dump bogus information on this site without being able to offer the slightest reference by link or attribution, and then you come back and say, "Well, sorry I can't offer a reference - just wanted a reaction," I regard it as comparable to dumping week old roadkill on my plate and saying, "Let me know how it tastes."

I regard gold as a hybrid between the libertarian "real" money idea and a commodity. I really don't think it responds well to deflation as commodities do not, but it does respond well to fiscal panics, even deflationary ones. Of course its real forte is hyperinflation. So my feeling is that gold will hold most of its value, or even increase, during the meltdown, but once we are on the bottom of the L shaped depression, it will not do well

“Russell comment -- The question I ask myself is this -- "can the dollar hold together in the face of the ongoing negative compounding?" The national debt is now the size of the annual GDP of the US, which is $13 trillion. I'm hanging on to my gold.

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.”Richard Russell, Dow Theory Letters, Remarks 10-10-08

All the gold ever found and currently existing would cover a football pitch by just over a meter. To base a worldwide currency on such a meager pile would require a quantum jump in price and probably suspension of commodity futures trading. Is the financial world ready to try it?

"Nah, want to know what I think? I think the banks and funds bought back their own swaps in that one. You know, save face, and all that. Besides, who cares anymore? They buy it back, and Monday morning Paulson offers to get it off their sheets, at the same 800% overpay, with your money. Dead Stinky Fish. Glib and salty."

If I understand you correctly, Ilargi, and if you are right, is this not an outrageous fraud on the public?

This question may reflect my ignorance, but where would the banks get the money?

Recreate the Franc and D-Mark as back-ups? In parallel with a new euro?

Do people have any idea what it means (and costs) to create a new currency? Or what it would cost to revert to an old one?

Actually this wouldn't need to be that expensive and not right away.

Splitting of the Euro could be accomplished quickly by notifying the public of the "country of origin" numbers on the bills and coins, then as the bills and coins get rotated out you create new ones with new motives etc. As I understand it every country still prints it's own Euros.

As for running the Franc and DMark in parallel, this would most likely end up the same way as it was done with the Euro, first in "electronic" form, pegged to the Euro and later if need be in real currency.

My guess is, if this is REALLY considered it will be done "behind closed doors", as a shadow currency as to not destroy trust / belief in the new Euro.

The question for me would be how the ECB would manage two separate Euros, and how this would be actually be pushed through? Does anybody know where the Euro was "legalized", read, which Contract was signed and what does it say? A quick search didn't turn anything up, but I am pretty sure it must be out there somewhere.

I listened to e-town tonight which included an interview with Robert Kennedy Jr which was recorded during the recent DNC. He used Iceland as an example of an extremely wealthy country and attributed it to their geothermal energy, making a case for a national policy to cut greenhouse emissions. (not that it was an accurate assessment) My, how rapidly the news is changing. Pre-recorded shows are obsolete before they're run. It gives me shivers to think about how rapidly it will change from here. A

Ebrown said I've had a number of people tell me they wish now they'd listened to what I had to say.

Me too. But I've had almost as many recently say that they're glad they did listen to me. I reminded the operator of the organic community I volunteer at that it took 25 years for the DOW to regain its pre-'29 level. But I didn't realize that the DOW actually lost 95% of its value from its high in '29 to its low in '33 in several demoralizing cascades.

Anon 8:45 pm -- RE: Savings Accounts.I wasn't deprecating your establishment of a savings account -- but rather questioning whether your savings should be in electronic digits or in physical form (i.e., currency-in-hand) -- especially given our current precarious circumstances. My apologies for not being more clear.

I've made the now obviously stupid mistake of having my packages of emergency supplies delivered to my work over the past two years. Big boxes labeled "emergency essentials" and the like. In the last two weeks at least a half dozen people out of a company of about 125 have joked about who's place they're going to show up at if the shit hits the fan.

If people start showing up at my door, I'm going to, by necessity, be "on the road, on the run... and having the time of my life", as they say in the movie advertising business.

Said perfectly, Ilargi. The only question, now, is "When does the 'downsizing' start?" When do they start killing those of us off who are no longer useful to the machine?? That I see happening very damn soon.

Because, if what you said is right (and it is), we are no more than "losses" for the corporations (who are, now, the only real "citizens" of this "country" to write off...)

thehangedman: How can the US survive this? It's like how I'll respond to Edward Lowe.

To wit (Edward Lowe): We're financing it with the last vestiges of the US dollar. It's dead and gone. Most of the world map will have to be redrawn after this all shakes out this time, because many countries (as thehangedman correctly points out) won't survive this.

snuffy: What reason can one give that we are going to hold an election? To give appearances there will be an orderly transfer of power, when anyone with two brain cells knows we won't??

I may not vote in this election (and, if I do, I don't have long to check to see that I am registered) because I don't think it's going to matter, because there will probably be significant civil unrest before the year is out anyway.

And there won't be an option in those "retirement plans", either -- many of us will probably be slaves in concentration camps, and, once we aren't of any more use -- dead.

Madhatter vis-a-vis gold: Seizures of private gold stock will begin Real Soon Now. Remember your history. And, especially if (and because!) you are right, you can expect the seizures of gold to be quite competitive, because, once we go gold-backed again, the more gold means the more power over the world's money situation.

Ilargi: This is why I disagree with Denninger's "Genesis Plan" -- the fact is that everything IS worth NOTHING. The only reason the Lehman CDS's got 8 cents on the dollar is they were being leveraged (as you correctly pointed out) on everyone else's still-toxic crap! If everyone's toxic crap were taken from the books and examined _every meaningful company in the world_ would collapse in one instant.

Think that one over if you think we still have a future as a human race.

Blue Monday: The only reason the United States even _exists_ today is that the rest of the world can't get off the dollar fast enough -- and will die as a result.

anon, regarding gold-backing: They may not have a choice. What I see happening is, at minimum, a temporary One World Government, followed by an absolute redrawing of the geographical and political maps, with new countries and currencies. The entire world, as presently governed, will be destroyed.

ningen: Not any more of a fraud than their entire propping up of the world economy for the last X years (X>5).

michael: There would no longer be one European Central Bank. There'd have to be two.

Did anyone else note the Op-Ed piece in NYT Friday, Oct. 10 by economist Casey Mulligan? "The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated....we're in a financial crisis, not an economic crisis...One important indicator is the profitability of non-financial capital, what economists call the marginal product of capital. "

So, any validity to his thinking? Or am I just dreaming someone is whispering in my ear, "wake up, none of this is happenning..."

IMHO, There is NO validity to his thinking and a more perfect example of the blindness of most economists to reality I think I have never seen! Someone should whisper in his ear very softly that car sales are a little down (as in CRASHING!!).

And, that little voice you hear is really saying "Go back to sleep -- nothing to be concerned about--just a little bump in the road--everything is OK...."

Wish I could believe the dark forecasts in some of the comments made earlier tonight were nothing but pure fantasy, ...but I can't.

The European Monetary Union and the euro were created by the Maastricht treaty (entry into force on 1 January 1993).

The name for the euro was selected in 1995.

The years 1999, 2000 and 2001 were the transition years after which only the euro existed in the participating countries.

I recognise that in times of upheaval, terrible things can happen, but we are not there yet.

The difficulties, costs and confusion arising from a failure of the euro will make many countries think very hard before they undertake any real action.

**********

Madhatter, no hard feelings, but I do tend to agree with El_Pollo that one should be able to provide at least some justification, links, reference, etc.

**********

To Ric and BrianM, would love to join your discussion, but it is over my head. My only question would concern the absoluteness of ethics. Putting those two notions together strikes me as counter intuitive.

Oct. 11 (Bloomberg) -- The leaders of France and Germany renewed calls for joint action by European governments to tackle the financial crisis, saying the 15 nations that share the euro will set up a ``toolbox'' of measures to respond to the turmoil."

Good now lets hear from another tool this side of the blue and wobbly.

``This is a serious global crisis and therefore requires a serious global response,'' Bush said

Staggering on let us take a rather unorthodox back flip in time for a foretaste of what the toolbox and the tool will likely accomplish:

I have posted on Garth's site before, but not on this one, though I read it daily.I, like some of your other writers am an R.N. My parents were much older than us, and grew up during the Great Depression. Their childhoods were extremely harsh. My father had to go to work when he was only 13! Then when WW ll began, his early start in the work force was put on hold, while he went off to war. My mother had to work for years and attend summer school to eventually become a teacher and sacrificed much to achieve this.The bailout that happened was a joke, though those in the finance world have heralded it as something that will turn things around.When I was about 12, I asked my parents what caused the GD, and their response mirrored what is happening today. Unfortunately, they are no longer here to ask more questions.The way I see things right now, is that we're not heading into a global recession, but rather on the brink of another Great Depression.

Are you saying there is some 'organization' of people who are going to seek out the un-useful and 'downsize' them?

I would doubt very much that anything so deliberate is coming, although tragically circumstances may achieve something comparable all by themselves. Many people aren't going to live out their natural lifespan as they are so acutely vulnerable to the loss of life-support systems.

The loss of purchasing power can develop very quickly, especially in a credit-addicted population living paycheque to paycheque. People could easily lose their credit, income, benefits, entitlements, savings and investments in quick succession, and thereafter their homes, even if they previously thought their debt was manageable. Life on the streets is almost unimaginably hard, and so few people have any really useful skills.

I think we'll see severe unrest and consequent repression, but not active and premeditated malice on the scale that Starcade envisages (at least not here and not now).

Blue Monday:A number of countries think the USD is done as a world reserve currency. Gee, think the dollar represents honest hard work and integrity? The dollar is fiat toilet paper, it's obvious to chimps at this point.I have heard a lot of comments similar to yours but have not seen any real action in this regard. Maybe after we have lived through this crash things will change and people around the world will use a different currency as the main exchange currency. But in the moment part of the strength in the Dollar comes from the fact that a lot of the deals now unwinding are traded in the Dollar and cannot change the currency.

Propping up the stinking corpse of the US dollar will keep going for a bit longer, but it really is the proverbial 'dead parrot'.It's Not sleeping or pining for the Fiords, it's dead.As a lot of currencies are still pegged to the dollar, notably all the oil sheiks except Kuwait, I wonder when they will react and decouple from the sinking ship. A good question is also if they will act soon and be part of the cause of the Dollar decline or just react so late that their decision does not matter anymore in the grand scheme of things.

Just a guess, but China, Russia, Germany and France all are probably secretly maneuvering to buy Lots of Gold to have their currencies back by Gold, not fiat funny money.I would agree to China as they seem to have a very good long term strategy in regards to their currency and economic policies which is visible in their actions. I´m not sure about Russian policy and if they are moving in that direction, at least they still have some of the golden stuff in the ground. France and Germany are in my eyes very unlikely to follow your suggestion as they were still sleeping through the crisis until last week.

Imagine, going back to a gold standard and the US out in the cold because it already hocked all it's gold to delay paying it's 'gambling debts.' There are lots of rumours that most of the Gold has been lent out. Not sure if that is on purpose and what effect that has on the gold price. But even when the situation looks dangerous now at recent debt levels remember that countries like Italy are living with a bigger debt per capita for a long time and life is not too bad there at all. Maybe the Mafia is helping after all....

Stoneleigh - Thank you, I can see a lot of civil unrest unfolding to be able to survive, I just could not see organized premeditated malice.And thanks for pointing us to the commentary at the OilDrum.Anonymous Reader

Ok, I finally have a real, and difficult question for Ilargi and Stoneleigh.

I have a metallurgy patent pending in the EU. My patent attorneys are yelling for their "annuity" to keep the application alive- and there has been progress; last version came back recently hardly mussed up at all. I already have the US and Chinese patents for the same invention. The annuity they want is around $1600.00 US.

The invention would result in a lot of energy savings, in a lot of industries; so there should be demand for it, regardless of the state of the world.

My question: what are the chances there will be an EU in a year- and what are the chances they will be enforcing patents?

madhatter's description of a dual-Euro may or may not be true but it sounds like cultural realism.

I always saw the European Union in less than idealistic terms: a method for the real engines of money, power, and cultural change - England, France, and Germany - to keep from declaring war on each other at regular intervals, while monitoring and regulating the behavior and the resources of adjacent smaller states.

The EU is England, France, and Germany. Every other member wants a free lunch.

So why not have two Euros? A Euro for the engine states and another Euro as a meal ticket?

Blue bird don't worry, there will be so many among the untermensh who are young armed and angry in America that the overlords will be more likely to try feeding them than try extermination. In the process they will feed the bluebirds too - just scowl a lot and please do try to look fierce:(#)

Bluebird: Yes, I firmly believe there is an organization (firmly rooted in the neo-con Republican Party) who finds it its mission (as the only way to balance the budget) to find and eliminate those not useful to the process. It's the same concept of eliminating (through attrition) those not useful to a company when money matters force the company to down-size. As for who "they" are, I'd start with the PNAC and Blackwater types and go from there.

In the neo-con "America", there is no difference between country and corporation.

Stoneleigh: I disagree entirely on the deliberate-ness and malice not being in the process. I think that's been the entire point of it for most of said process.

This is because of two things:

1) The social (and many believe physical) infrastructure of this country cannot hold the present (legal -- forget the illegals on top of it) population, even with a credit-based economy.

2) I think we all know what's going to happen once the final crash hits Main Street. The only enforcement of value, at that point, is the barrel of a gun and the bullets inside.

I believe this is deliberate. I believe this is intentional. I believe this is the end of the American democracy -- an end _DESIGNED_ by PNAC and those who support it.

fb: The fact that you are not an American is probably the source of a lot of said positivity.